How to measure financial market efficiency? A quantitative evaluation of higher order dependencies: the case of the European carbon market

Cristina Sattarhof, Marc Gronwald

Research output: Working paperDiscussion paper

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Abstract

This paper introduces a new method for the evaluation of financial market efficiency, using the so-called intermittency coefficient, a parameter of the multifractal random walk model by Bacry et al. (2001). As the intermittency coefficient can quantify the degree of nonlinear departures from a random walk, we employ its estimates from financial data as a proxy for the loss of financial market efficiency. In an empirical application using data from the largest currently existing market for tradable pollution permits, the European Union
Emissions Trading Scheme (EU ETS), we show that the degree of efficiency of this market remains largely unchanged over the period of observation 2008 - 2019. What is more, the EU ETS is found to be more efficient than the US stock market. This result, surprising as such, is attributable to the large share of well-informed market participants in the EU ETS as well as a lower exposure to global economic shocks.
Original languageEnglish
PublisherUniversity of Aberdeen
Pages1-24
Number of pages24
Publication statusPublished - 29 Feb 2020

Publication series

NameDiscussion Papers in Economics and Finance
PublisherUniversity of Aberdeen
No.2
Volume20
ISSN (Electronic)0143-4543

Keywords

  • Weak-form Market Efficency
  • Degree of Market Efficiency
  • Multifractality
  • Multifractal Random Walk
  • European Union Emissions Trading Scheme

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